Q&A Hero

Q: The finance balance sheet is A) the same as the accounting balance sheet, but it is based on market values. B) the same as the accounting balance sheet, but it does not have to balance. C) based on cash rather than accrual accounting. D) the same as the accounting balance sheet, but it is based on historical values.

Q: A firm's overall cost of capital is A) less than its cost of debt. B) a weighted average of the costs of capital for the collection of individual projects that the firm is working on. C) best measured by the cost of capital of the riskiest projects that the firm is working on. D) None of the above

Q: Firms have no way to directly estimate the discount rate that reflects the risk of A) a publicly traded security. B) its debt securities. C) the incremental cash flows from a particular project. D) None of the above

Q: If a company's weighted average cost of capital is less than the required return on equity, then the firm A) is financed with more than 50% debt. B) is perceived to be safe. C) has debt in its capital structure. D) must have preferred stock in its capital structure.

Q: When using a single rate, such as the WACC, to discount cash flows for all projects of a particular company, the discount rate could lead to accepting projects that will actually have a negative NPV. A) True B) False

Q: The estimated cost of capital the financial manager use for efficiency projects tends to be higher than the cost of capital used to evaluate new projects. A) True B) False

Q: The correctly calculated weighted average cost of capital for a firm can be used to discount the cash flows for any new project that the firm may undertake in the future. A) True B) False

Q: The proportions of debt and equity used to determine the weighted average cost of capital for a firm is based on the market value of debt and equity outstanding. A) True B) False

Q: The CAPM can only be used to determine the cost of common equity. A) True B) False

Q: The current cost of preferred equity can be found by taking the ratio of the annual dividend on the preferred stock to the current price of preferred shares. A) True B) False

Q: If a firm is currently paying common share dividends to investors and those dividends are expected to grow at a low but steady rate in the future, then the cost of common equity for the firm can be determined by also using the current price of the firm's common shares. A) True B) False

Q: The market risk premium for the future is always perfectly known, and it is 6.51 percent. A) True B) False

Q: When trying to estimate the cost of equity for a firm using the CAPM, it is possible to find the beta of a comparable, publicly traded firm whose primary business is closely related to the firm. A) True B) False

Q: The correct Treasury rate to use in calculating the cost of equity (when using the CAPM) for a firm is a short-term rate. A) True B) False

Q: The cost of equity for a firm must take the cost of preferred stock (if any has been issued) that the firm has outstanding into account. A) True B) False

Q: Estimates of expected returns based on market security prices will be reliable in all types of markets, including those deemed less efficient than others. A) True B) False

Q: Utilizing the CAPM to estimate the cost of capital for a project is difficult in practice because analysts do not have the stock returns from individual projects that are necessary to use in a regression analysis for estimating a project's beta. A) True B) False

Q: The issuance costs of new debt securities can be ignored since those costs will not be reflected in the yield to maturity of the debt in the future. A) True B) False

Q: If a firm is subject to income taxes, then the after-tax cost of debt for the firm will be less than the before-tax cost of debt. A) True B) False

Q: The current cost of bank debt of a firm can be determined by asking the firm's banker. A) True B) False

Q: The yield to maturity is the discount rate that makes the present value of coupon and principal payments equal to the price of the bond. A) True B) False

Q: The yield to maturity for an annual coupon paying bond will always be equal to the coupon rate. A) True B) False

Q: Milton Corp. issued bonds 10 years ago with a coupon rate of 10 percent at a price of $1,000. The current price of the bonds is $980. The before-tax cost of the debt to the firm is still 10 percent. A) True B) False

Q: The historic cost of long-term debt is the appropriate cost of debt for WACC calculations. A) True B) False

Q: With respect to the cost of capital, we are generally interested in the cost of a source of financing on a particular date. A) True B) False

Q: Long-term debt is generally viewed as a permanent financing source for a firm. A) True B) False

Q: Long-term debt typically describes debt that will mature in two years or more. A) True B) False

Q: If one observes the market quoted price of a debt security where the expected cash flows of that security are known, then one can calculate the current cost of that security to the firm. A) True B) False

Q: If a firm finances the purchase of an asset with cash, then it has zero financial cost to the firm. A) True B) False

Q: A firm is currently taking on two projects with an individual cost of capital of 10 percent and 12 percent for each of the projects. This means that the before-tax cost of capital for the firm must be between 10 and 12 percent. A) True B) False

Q: Due to the magic of diversification, the risk associated with the assets of a firm must be less than the risk associated with the financing, or debt and equity that a firm is utilizing for its assets. A) True B) False

Q: The beta of a firm is equal to the weighted-average sum of the betas of the individual projects that the firm is currently operating. A) True B) False

Q: If the market value of a firm's assets is greater than the book value of its assets then the book value of the firm's liabilities and equity must be less than the market value of the firm's liabilities and equity. A) True B) False

Q: The finance balance sheet is based on market values, just like the accounting balance sheet. A) True B) False

Q: Using a firm's overall cost of capital to evaluate a project's cash flows is problematic in that the firm is a collection of projects, with the possibility that each project has a different level of risk than the other projects currently working for the firm. A) True B) False

Q: Systematic risk is the only risk that investors require compensation for bearing. A) True B) False

Q: Discuss the two major conditions for when a firm may use its current weighted average cost of capital to evaluate a new project's cash flows.

Q: Explain the conditions under which the constant-growth dividend formula for the cost of common stock can be used to find the cost of common equity capital for a firm.

Q: Briefly explain why the book value of debt might not reflect the current cost of debt for a firm, with respect to a single issuance of debt?

Q: Which type of project do financial managers typically use the highest cost of capital when evaluating? A) Extension projects B) New product projects C) Efficiency projects D) Market expansion projects

Q: Droz's Hiking Gear, Inc. has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. It has 7-year semiannual maturity bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. The firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt. What is the after-tax weighted average cost of capital for Droz's, if it is subject to a 35 percent marginal tax rate? Round your final percentage answer to two decimal places.A) 10.20%B) 11.76%C) 11.88%D) 13.32%

Q: Marley's Pipe Shops has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. Its cost of debt financing is 12 percent. The firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt. What is the after-tax weighted average cost of capital for Marley's, if it is subject to a 35 percent marginal tax rate?A) 10.20%B) 11.76%C) 11.88%D) 13.32%

Q: Poly's Parrot Shops has found that its cost of common equity capital is 17 percent. It has 7-year maturity semiannual bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. The firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt. What is the after-tax weighted average cost of capital for Poly's, if it is subject to a 35 percent marginal tax rate? Round your final percentage answer to two decimal places. A) 10.20% B) 11.76% C) 11.88% D) 13.32%

Q: Ronnie's Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. The firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt. What is the after-tax weighted average cost of capital for Ronnie's, if it is subject to a 35 percent marginal tax rate? A) 6.05% B) 9.6% C) 8.75% D) 13.65%

Q: Maloney's, Inc. has found that its cost of common equity capital is 17 percent and its cost of debt capital is 6 percent. The firm is financed with $3,000,000 of common shares (market value) and $2,000,000 of debt. What is the after-tax weighted average cost of capital for Maloney's, if it is subject to a 40 percent marginal tax rate? A) 8.96% B) 11.16% C) 11.64% D) 12.60%

Q: Swirlpool, Inc. has found that its cost of common equity capital is 18 percent, and its cost of debt capital is 8 percent. The firm is financed with 60 percent common shares and 40 percent debt. What is the after-tax weighted average cost of capital for Swirlpool, if it is subject to a 40 percent marginal tax rate?A) 10.37%B) 12.00%C) 12.72%D) 14.00%

Q: The WACC for a firm is 13.00 percent. You know that the firm's cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt? Assume there are no taxes. A) 30% B) 33% C) 50% D) 70%

Q: The WACC for a firm is 19.75 percent. You know that the firm is financed with $75 million of equity and $25 million of debt. The cost of debt capital is 7 percent. What is the cost of equity for the firm? Assume there are no taxes. A) 19.75% B) 24.00% C) 32.50% D) 58.00%

Q: You are analyzing the cost of capital for a firm that is financed with $300 million of equity and $200 million of debt. The cost of debt capital for the firm is 9 percent, while the cost of equity capital is 19 percent. What is the overall cost of capital for the firm? Assume there are no taxes. A) 13.0% B) 14.0% C) 15.0% D) 16.0%

Q: You are analyzing the cost of capital for a firm that is financed with 65 percent equity and 35 percent debt. The cost of debt capital is 8 percent, while the cost of equity capital is 20 percent for the firm. What is the overall cost of capital for the firm? A) 12.2% B) 14.0% C) 15.8% D) 20.0%

Q: The Diverse Co. has invested 40 percent of the firm's assets in a project with a beta of 0.4 and the remaining assets in a project with a beta of 1.8. What is the beta of the firm?A) 0.96B) 1.24C) 1.28D) None of the above

Q: Stryder, Inc. has 3 million shares outstanding at a current price of $15 per share. The book value of the shares is $10 per share. The firm also has $30 million in par value of bonds outstanding. The bonds are selling at a price equal to 101 percent of par. What is the market value of the firm? A) $30.0 million B) $45.0 million C) $75.0 million D) $75.3 million

Q: What is the beta of a firm whose equity has an expected return of 21.3 percent when the risk-free rate of return is 7.0 percent and the expected return on the market is 18.0 percent? A) 0.79 B) 1.30 C) 1.57 D) None of the above

Q: If the market risk premium is currently 6 percent and the risk-free rate of return is 4 percent, then what is the expected return on a common share with a beta equal to 2? A) 8.0% B) 10.0% C) 12.0% D) 16.0%

Q: In order to use a firm's WACC to evaluate its future project's flows, which of the following must hold? A) The project will be financed with the same proportion of debt and equity as the firm. B) The systematic risk of the project is the same as the overall systematic risk of the firm. C) The project should have conventional cash flows. D) Both A and B above

Q: Melba's Toast has a preferred share issue outstanding with a current price of $19.50. The firm is expected to pay a dividend of $2.34 per share a year from today. What is the firm's cost of preferred equity? A) 11.50% B) 11.75% C) 12.00% D) 12.25%

Q: Wally's War Duds has a preferred share issue outstanding with a current price of $26.57. The firm is expected to pay a dividend of $1.86 per share a year from today. What is the firm's cost of preferred equity? Round your final answer to nearest percentage. A) 6.50% B) 7.00% C) 7.50% D) 8.00%

Q: Billy's Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share. What is the firm's cost of preferred equity? Round your final answer to nearest percentage. A) 7% B) 8% C) 9% D) 10%

Q: Oasis, Inc. has common shares with a price of $21.12 per share. The firm is expected to pay a dividend of $1.75 one year from today, and dividends are expected to grow at 10 percent for two years after that and then at 5 percent thereafter. What is the implied cost of common equity capital for Oasis? Round your final answer to nearest percentage. A) 13% B) 14% C) 15% D) 16%

Q: Tranquility, Inc. has common shares with a price of $18.37 per share. The firm paid a dividend of $1.50 yesterday, and dividends are expected to grow at 9 percent for three years and then at 2 percent thereafter. What is the implied cost of common equity capital for Tranquility? Round your final percentage answer to 1 decimal place. A) 9.5% B) 10.5% C) 11.5% D) 12.5%

Q: The Dedus Shoes, Inc. has common shares with a price of $28.76 per share. The firm paid a dividend of $1.00 yesterday, and dividends are expected to grow at 10 percent for two years and then at 5 percent, thereafter. What is the implied cost of common equity capital for Dedus? Round your final percentage answer to 1 decimal place.A) 7.00%B) 8.00%C) 9.00%D) 10.00%

Q: Turquoise Electronics, Inc. paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10 percent next year and then zero thereafter, then what is its cost of equity capital if the price of its common shares is currently $25.71? A) 7.27% B) 8.00% C) 18.00% D) The problem is not solvable with the information that is given.

Q: UltraFlex Diving Boards, Inc. just paid a dividend of $1.50. If the firm's growth in dividends is expected to remain at a flat 4 percent forever, then what is the cost of equity capital for Ultra Flex Diving Boards if the price of its common shares is currently $26.00?A) 5.77%B) 6.00%C) 9.77%D) 10.00%

Q: Gangland Water Guns, Inc. is expected to pay a dividend of $2.10 one year from today. If the firm's growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50?A) 12.00%B) 14.65%C) 15.00%D) 15.36%

Q: Radical VenOil, Inc. has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, then what is the firm's beta if the marginal tax rate is 35 percent?A) 1.0B) 1.28C) 1.60D) 4.10

Q: TeleNyckel, Inc. has a beta of 1.4 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 9 percent and the market risk premium is 5 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent?A) 11.20%B) 10.60%C) 15.14%D) 16.00%

Q: Jacque Ewing Drilling, Inc. has a beta of 1.3 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 8 percent and the expected return on the market is 12 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 40 percent? A) 7.92% B) 13.20% C) 15.57% D) 23.60%

Q: The recommended model to estimate the cost of common equity for a firm isA) the one-stage constant growth dividend model.B) the multistage -growth dividend model.C) the capital asset pricing model(CAPM).D) None of the above

Q: The average risk-premium for the market from 1926 to 2012 was A) 8.00%. B) 7.50%. C) 5.71% . D) 6.51% + the Treasury rate.

Q: The appropriate risk-free rate to use when calculating the cost of equity for a firm is A) a long-term Treasury rate. B) a short-term Treasury rate. C) an equal mix of short-term and long-term Treasury rates. D) None of the above

Q: A recent leveraged buyout was financed with $50M. This amount comprised of partner's equity capital of $12M, $20M unsecured debt borrowed at 7% from one bank, and the remainder from another bank at 8.5%. What is the overall after-tax cost of the debt financing if you expect the firm's marginal tax rate to be 33%? A) 2.55% B) 3.34% C) 5.17% D) 7.71%

Q: PackMan Corporation has semiannual bonds outstanding with nine years to maturity and the bonds are currently priced at $754.08. If the bonds have a coupon rate of 7.25 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 30 percent? Round your intermediate calculation to two decimal places & final percentage answer to three decimal places.A) 7.050%B) 8.225%C) 11.750%D) 12.095%

Q: Discuss the differences between scenario analysis and sensitivity analysis.

Q: Briefly discuss the advantages of knowing the economic break-even point.

Q: Soleon, Inc. had the following financial data for the fiscal year ending September 30, 2014.Sales $1,937,813Depreciation and amortization $70,657Fixed costs $132,456Earnings before interest and taxes $564,441Calculate the firm's degree of pre-tax cash flow operating leverage during fiscal 2014?A) 1.21B) 1.46C) 1.17D) 1.85

Q: Briefly explain the difference between the degree of pretax cash flow operating leverage and the degree of accounting operating leverage. Also explain why someone might be interested in one or the other.

Q: The management Dior Corp. is planning to invest in a machine which has a four-year life. The initial investment of the project is $8,000, the annual addition to working capital is equal to $4,000. The fixed cost would be $4,000. The unit contribution margin is $15. The firm's marginal tax rate is 35%. The present value of net non-recurring investments would be $18,928. FCFt is $5,971.Compute the economic break even. (Round your intermediate calculation to whole dollar amount and final answer to the nearest whole unit.)A) 1,218 unitsB) 1,305 unitsC) 1,280 unitsD) 1,880 units

Q: Cino Inc. earned from its brake pads manufacturing unit revenue of $560,000 and depreciation and amortization for the unit was $50,000. The company sells its product to customers at a price of $100. Further, the financial statement reveals that the EBIT for the year was $80,000. The variable cost for each unit of brake pad is $60. What is the amount of fixed cost that leads to the EBIT as provided in the financial statement?A) $88,000B) $90,000C) $94,000D) $105,000

Q: OutCinq manufactures snow boards. The firm has fixed costs of $1,500,561. The snow boards sell for $235 each and have a variable cost of $92 each. What is the pretax operating cash flow break-even point for OutCinq? (Round to the nearest unit)A) 9,566 unitsB) 10,493 unitsC) 11,565 unitsD) 6,565 units

Q: SeptSeven has found that it is indifferent between purchasing a high-capacity vacuum component assembly machine or a lower capacity machine as long as sales are 1,900 units per month. The price of each calculator is $70. The high-capacity machine has cash expenses of $100,000 per month and depreciation and amortization expenses of $30,000 per month, while the alternative has cash expenses of $30,000 per month and depreciation and amortization expenses of $5,000 per month. Under the low-capacity alternative, variable costs per unit are $60. If the firm bases its decisions on the accounting operating profit break-even, then what is the variable cost per unit under the high-capacity alternative?A) $10B) $47C) $60D) $70